Public Workshop Public Workshop Preliminary Draft Regulation (PDR) - - PowerPoint PPT Presentation

Preliminary Draft Regulation (PDR) for a California Greenhouse Gas Cap-and-Trade Program

December 14, 2009 California Air Resources Board

Preliminary Draft Regulation (PDR) for a California Greenhouse Gas Cap-and-Trade Program

December 14, 2009 California Air Resources Board

Public Workshop Public Workshop

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Purpose of Today’s Workshop on the PDR Purpose of Today’s Workshop on the PDR

• 1. Provide an overview of draft regulatory

provisions and concepts for discussion

• 2. Invite stakeholder discussion and feedback
• Stakeholders are asked to provide

written comments to ARB by January 11, 2010

(http://www.arb.ca.gov/lispub/comm2/bcsubform.php?listn ame=dec-14-pdr-ws&comm_period=1)

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Outline of Presentation Outline of Presentation

• Opening Remarks
• Overview of the Preliminary Draft

Regulation (PDR)

• Review of Concepts for Discussion
• Comments and Questions

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Timeframe for Cap-and-Trade Rulemaking Timeframe for Cap-and-Trade Rulemaking

• January 2010: Economic & Allocation Advisory

Committee (EAAC) final recommendations on allowance allocation

• Spring 2010: 2nd draft regulation for public

comment

• September 2010: 45-day public review rule

package begins (3rd draft)

• October 2010: Board consideration of regulation
• 2nd Half of 2011: First auction of allowances
• January 1, 2012: First compliance period starts

PDR Structure PDR Structure

• Preliminary Draft Regulation includes a mix of:

– Preliminary regulatory language

• Cap-and-trade process and structure

– Narrative text

• Concepts for discussion where specific regulatory

language isn’t yet developed

– Placeholders

• Areas for future language to be included
• ARB seeking comment on entire PDR

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Applicability Applicability

• Covered Gases

– CO2, CH4, N2O, HFCs, PFCs, SF6 and NF3

• Covered Entities
• Opt-in Participants

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Beginning in 2012

• Operators of Facilities
• Electricity Deliverers

– Operators of in-state generating facilities – Importing deliverers

• Retail Providers
• Marketers

Beginning by 2015*

• Fuel Deliverers

– Transportation fuel deliverers

• Producers and Importers of Gasoline, Diesel and Biofuels

– Natural gas deliverers – Deliverers of natural gas liquids

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What Entities Would Be Covered and When? What Entities Would Be Covered and When?

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Narrow Scope Broad Scope

*Issue discussed in later slide

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Who are Opt-In Participants? Who are Opt-In Participants?

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• Opt-in participants are not covered entities

but voluntarily participate in the cap-and- trade market in order to:

– Retire, purchase, hold, or sell compliance instruments – Operate offset projects registered with ARB – Verify greenhouse gas emissions and emission reductions – Operate over-the-counter clearinghouses or trading facilities handling transactions of compliance instruments

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Proposed Threshold for Inclusion of Covered Entities Proposed Threshold for Inclusion of Covered Entities

• 25,000 metric tons of CO2e per year for all

covered entities

• Only emissions that generate a surrender
• bligation are counted toward this threshold

– Biomass combustion at stationary sources excluded – Most fugitive emissions excluded – Staff thinking detailed in PDR Scope Table

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Detailed Scope Table Detailed Scope Table

• Outlines preliminary staff thinking on:

– Which emissions generate a surrender

• bligation

– Additional types of process emissions for stationary sources that will be reported – Coverage of fuel deliverers – Thresholds for inclusion in cap-and-trade and mandatory reporting – Comparison to WCI Essential Reporting Requirements

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What Would a Covered Entity Need to Do? What Would a Covered Entity Need to Do?

• 1. Register with ARB
• 2. Report emissions during the

compliance period

• 3. Acquire compliance instruments
• 4. Surrender compliance instruments to

match surrender obligation

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Registration and Tracking Registration and Tracking

• Registration creates two types of accounts in the

tracking system:

– Holding Accounts – Compliance Accounts

• Registration required to hold a California

compliance instrument

• Opt-in registration may be revoked for rule

violations

• Restrictions may be placed on covered entity

accounts for rule violations

When Does Registration Occur? When Does Registration Occur?

• Entities would register before holding

California compliance instruments

• Registration Deadlines

– Covered entities reporting GHG emissions under the MRR by January 1, 2012 would register by March 31, 2012 – Covered entities subject to reporting under the MRR after January 1, 2012 would register within 90 days of notifying ARB of their reporting obligation – Opt-in participants may register at any time

Reporting Requirements for Covered Entities Reporting Requirements for Covered Entities

• ARB will revise Mandatory Reporting

Regulation (MRR) to harmonize with rules applicable to cap-and-trade provisions

• Staff will present MRR revisions to the

Board in the same rulemaking package as the cap-and-trade regulation in October 2010

Some Anticipated Changes to MRR Some Anticipated Changes to MRR

• Reporting threshold to be based on CO2

equivalent (CO2e) emissions, rather than CO2

• Lower reporting threshold to 10,000 MT CO2e
• Annual verification of emissions data reports

for all facilities above the cap threshold of 25,000 MT CO2e

• Additional reporting requirements for

industrial process and fugitive emissions, and reporting of emissions by upstream suppliers

• f fuels

Y 1 Q1

Timing of the Compliance Cycle

(Example using a 3 year compliance period)

Timing of the Compliance Cycle

(Example using a 3 year compliance period)

Q2 Q3 Q4 Y 2 Y 3 Y 4

• Start 1st Period
• Auction
• Submit unverified

Y0 emissions

• Submit

verified Y0 emissions

• Auction &

free allocation

• Auction
• Auction
• Submit

verified Y1 emissions

• Auction &

free allocation

• Submit

verified Y2 emissions

• Auction &

free allocation

• Submit

verified Y3 emissions

• Auction &

free allocation

• Auction
• Auction
• End 1st Period
• Initial surrender

for 1st period emissions

• Auction
• Start 2nd Period
• Auction
• Submit unverified

Y3 emissions

• Auction
• Auction
• Auction
• Final

surrender for 1st period emissions

• Auction
• Submit

unverified Y1 emissions

• Auction
• Submit

unverified Y2 emissions

Instruments Issued by CA

• CA Greenhouse Gas Allowances
• CA Greenhouse Gas Offset Credits

Examples of Instruments Issued by External Programs that Could be Approved for Use*

• WCI Partner Jurisdiction Allowances
• WCI Partner Jurisdiction Offsets
• Certified Emission Reductions (CERs)
• Climate Reserve Tonnes (CRTs)

Color Coding:

Would Not be Subject to the Use Limit Would be Subject to the Use Limit

Compliance Instruments: What Could Be Traded? Compliance Instruments: What Could Be Traded?

* May be used if linkage to these systems is approved

How Many Allowances Would Be Issued? How Many Allowances Would Be Issued?

• PDR contains illustrative numbers that show

relationship between allowances, offsets and historical emission levels

– Presented graphically on the next slide

• Spring 2010 draft regulation to contain draft

allowance budgets and offset limit level based on projected estimates

– 2012 emissions estimates for all sources – 2015 emissions estimates for fuel providers

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Example Cap Numbers Example Cap Numbers

Historical Emission Trends Relative to Example Allowance and Offset Levels

50 100 150 200 250 300 350 400 450 500 1 9 9 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 2 1 2 1 1 2 1 2 2 1 3 2 1 4 2 1 5 2 1 6 2 1 7 2 1 8 2 1 9 2 2 Offsets Allowances Broad Scope Historical Emissions Narrow Scope Historical Emissions

MMTCO2e

Available from: http://www.arb.ca.gov/cc/capandtrade/meetings/121409/capcalc.xls

Allocation of Allowance Value Allocation of Allowance Value

• PDR contains placeholder for allocation

provisions

• PDR summarizes three claims to value of

allowances discussed by the Economic and Allocation Advisory Committee (EAAC):

– Compensation for harm – Californians’ common claim on allowance value – Financing public spending related to the goals of AB 32

• Final recommendations from EAAC expected

in January 2010

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How Many Offsets Would Be Allowed?

• Scoping Plan Policy

Goal:

– Majority of reductions come from the covered entities

• Example

implementation of the usage limit: O/S ≤ 4%

• O is the number of
• ffsets surrendered

– Shown in orange

• S is emissions

– S must equal the compliance instruments surrendered (orange plus purple)

2020 2018 2015 2012 Greenhouse Gas Emissions

2012 Emission Levels (Broad Scope) Allowances Issued

• Min. Red. From Capped Sources
• Max. Reductions From Offsets

Offset Credits Offset Credits

• PDR identifies rules for two types of offset

credits:

– Offset credits issued by ARB – Offset credits issued by an external program and accepted/approved by ARB

• Discusses whether the offsets system would be

administered by ARB or an independent entity that reports to the Board

• Identifies approval process and requirements

for offset quantification methodologies for offset credits issued by ARB

General Requirements for Offset Credits General Requirements for Offset Credits

• Reductions would need to meet all

AB32 and ARB criteria (real, additional, quantifiable, permanent, verifiable and enforceable)

• Subject to a quantitative usage limit
• Offset projects would need to

commence after 12/31/2006

Offset Credits Issued by ARB Offset Credits Issued by ARB

• Offset projects would use a Board-approved offset

quantification methodology and would be registered with ARB

• PDR discusses and asks for comment on where,

geographically, ARB could issue offset credits

• PDR describes process for ARB credit issuance

including:

– Approving offset quantification methodologies – Reviewing/ approving offset projects for registration – Overseeing monitoring/recordkeeping of project activities – Reviewing verification statements from third-party verifiers – Determining the issuance and amount of offset credits

Process for Offset Credits Issued by ARB Process for Offset Credits Issued by ARB

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(1). Offset Quantification Methodology Approval (2). Offset Project Registration (3). Offset Project Approval (4). Monitoring of Offset Projects (5). Verification

• f emission

reductions from

• ffset project

(6). Offset Credit Issuance and Registration

Steps can be combined administratively

Offset Quantification Methodologies Offset Quantification Methodologies

• For offset credits issued by ARB, the Board would

approve each offset quantification methodology

• Approved methodologies would consist of

standardized methods for estimating project baselines and determining additionality

• PDR lays out requirements for methodologies

including: quantification, additionality, baselines, accounting for leakage and uncertainty, no net harm, permanence, crediting periods, monitoring and reporting and verification

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What Other Compliance Instruments Could be Allowed? What Other Compliance Instruments Could be Allowed?

• PDR identifies criteria and eligibility for

linkage to external GHG emissions trading systems (ETS) and GHG offset crediting systems

• All linkages would be approved by the Board
• PDR identifies mechanisms needed for

enforcement purposes, such as a MOU

– ARB would formalize enforcement agreements for all phases of cap-and-trade program

• perations

Offset Credits Issued by External Programs and Approved by ARB Offset Credits Issued by External Programs and Approved by ARB

• Offset credits issued by other programs may be

approved if they meet AB 32 criteria and are issued by a program that is approved by the Board

• Specific provisions for offset credits issued to

projects located in the U.S., Canada, and developing countries

– Project types must be approved by the Board

• Provisions for sector-based credits including

approval of sectors and crediting baselines

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Concepts for Discussion Concepts for Discussion

• Scope
• Cap Adjustments
• Offsets
• Cost Containment

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Scope: Inclusion of Fuels in 2012 Scope: Inclusion of Fuels in 2012

• The Scoping Plan discussed staggered

approach for program scope

– Facility operators and electricity deliverers beginning in 2012 – Fuel deliverers beginning in 2015

• ARB seeking comment on whether

inclusion of fuel deliverers should be accelerated to 2012

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Scope: Surrender Obligation for Transportation Fuels (1) Scope: Surrender Obligation for Transportation Fuels (1)

• PDR includes four options for calculating

surrender obligation for gasoline, diesel, and biofuels:

• 1. Net “carbon content”
• 2. Tailpipe combustion factor
• 3. Net “carbon content” plus some portion of

lifecycle emissions

• 4. Emission factors based on lifecycle carbon

intensity factor (per LCFS)

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Scope: Surrender Obligation for Transportation Fuels (2) Scope: Surrender Obligation for Transportation Fuels (2)

• ARB is requesting comments on these
• ptions, as well as the relative importance
• f:

– Fuel-switching incentives – Consistency of accounting across end uses – Scalability to a broader program – Reporting/administrative complexity

Cap Adjustments: Voluntary Renewable Electricity Generation Cap Adjustments: Voluntary Renewable Electricity Generation

• Policy Goal: Maintain current incentives for voluntary

investment in renewable power

• Estimate amount of voluntary renewable power (MWh)

expected in a period

– Calculate amount of emissions from fossil power expected to be displaced by this power

• Withhold allowances from the budgets to account for this

expected voluntary renewable power

• Measure actual amount of voluntary renewable power
• ccurring
• Retire held allowances (adjust the allowance budget) to

account for demonstrated emission reductions

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Offsets: Geographic Issuance of ARB Offset Credits Offsets: Geographic Issuance of ARB Offset Credits

• Staff evaluating where ARB should issue offset

credits

– Options include limit to projects located in CA; in the U.S.; in North America; or internationally (no limits)

• Project oversight is more manageable with a

smaller geographic area, but could lead to greater dependence on offsets issued by other programs

• For projects outside CA where there is less

regulatory stringency for certain emitting activities, ARB is evaluating whether a benchmark for additionality should be set at the CA regulatory level

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Offsets: Current Board-Approved Offset Methodologies Offsets: Current Board-Approved Offset Methodologies

• Beginning in 2007 the Board began adopting

quantification methodologies for voluntary purposes

– Endorsed only the quantification methodologies as the highest standard for carbon accounting

• ARB has not yet adopted any verification

requirements for reductions resulting from these methodologies

• To be considered for compliance purposes,

reductions from the use of these methodologies would be subject to regulatory verification and enforcement requirements

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Offsets: Enforcement

• f Offset Credits

Offsets: Enforcement

• f Offset Credits

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• ARB may take enforcement action against third-

party verifiers, offset project developers, and

• ffset users
• Offsets determined to be ineligible after issuance
• r acceptance would result in revocation of the

credit for compliance use

• Covered entities that surrender offsets later

deemed ineligible are responsible for replacing the lost tons

– Covered entities could take recourse with the project developer through “make-whole contracts” to replace lost tons

Cost Containment: Price Mitigation Principles Cost Containment: Price Mitigation Principles

• Staff focusing on the following

principles when considering cost containment options:

• 1. Any attempt at price mitigation limits price

discovery and adjustment, which are main benefits of cap-and-trade

• 2. Mechanisms must ensure the

environmental integrity of the cap by not including a “safety valve”

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Cost Containment: Price Collars Cost Containment: Price Collars

• Stakeholders have expressed concern
• ver compliance instrument prices that

are either too high or too low

• ARB is considering cost containment
• ptions based on target prices known as

“Price Collars”

– “Hard” collars are price controls – “Soft” collars mitigate prices by changing the supply of instruments in the market – ARB staff believe “soft” collars would distort the market less than “hard” collars

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Cost Containment Option: Auction Reserve Cost Containment Option: Auction Reserve

• ARB could set a minimum auction price

(“Reserve Price”) below which allowances could not be sold at auction

– This would not set a minimum price for secondary trades – Unsold allowances could be held in a Reserve Holding Account – Account could be augmented through direct allocation

• Allowances could be released from the Reserve

during times of high prices

• ARB requesting comment but will not make a

recommendation until receiving EAAC report

Cost Containment Options: Soft Price Ceilings Cost Containment Options: Soft Price Ceilings

• Public discussions on cost containment focused
• n four options that would increase the number of

instruments in the market:

1. Release allowances from a Reserve

• Does not require changes to PDR
• Provides only limited increase in credit supply

2. Relax quantitative use limit for offsets

• Reduces direct reductions within California

3. Expand acceptable offset projects by type or location

• May reduce offset quality

4. Allow limited borrowing from next compliance period

• Must avoid “cascading” borrowing

Cost Containment: Length of Compliance Periods Cost Containment: Length of Compliance Periods

• PDR proposes three-year compliance periods

– Through 2020: 2012-2014, 2015-2017, 2018-2020

• A three-year compliance period could increase

the magnitude of potential defaults

• PDR considers two options for mitigating the

size of potential defaults:

– Require covered entities to cover a portion of emissions by surrendering compliance instruments at periodic intervals – Shorten compliance period to one year with borrowing from the following year

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Special Thanks to: Special Thanks to:

• California Energy Commission
• California Public Utility Commission
• ARB Enforcement Division, Legal Office,

Planning and Technical Support Division, Research Division, and Stationary Source Division

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Cap-and-Trade Program Development Team Cap-and-Trade Program Development Team

International forestry Barbara Bamberger Allocation strategy Matt Zaragoza, Mihoyo Fuji, Ashley Dunn, Sam Wade Impact analyses (environmental, economic, localized, small business, public health) David Kennedy, Stephen Shelby, Mihoyo Fuji, Dave Allgood, Matt Botill, Jeannie Blakeslee, Candace Vahlsing Regulation coordination Yachun Chow Sam Wade, Mary Jane Coombs, Dave Allgood Cap setting Ray Olsson, Matt Botill, Ashley Dunn Market operations and oversight Brieanne Aguila Offsets, linkage, and cap-and-trade project manager Claudia Orlando, Bill Knox Electricity and energy efficiency Manpreet Mattu Reporting Bruce Tuter, Mihoyo Fuji Industrial sectors Stephen Shelby Offsets and linkage Karin Donhowe Broad scope fuels *Lead Contact

Now It’s Your Turn Now It’s Your Turn

• Comments and questions